Wayne -
(...Does anyone know what the real inflation rate is?
There is such a wide range of opinions on substitution, assets, quality improvements, private vs. government services, taxes, etc...)
If by inflation, you were to simply mean a time rate of change for the historical prices of a limited number of specific products, then an algorithm for calculating inflation could at least be defined, but the results would not be very useful due to a continuous product evolution in both characteristics and variety.
If you instead take inflation to be a measurement of the purchasing power of money, it is a meaningless concept. All that can be observed is that consumer A exchanges $X for quantity Y of product Z at a particular time T.
The entire information contained in this observation is that A subjectively values quantity Y of Z more than he values $X at time T. Nothing can be deduced about the degree to which A prefers a quantity Y of Z to $X. In fact, the degree of preference not only lacks an assignable amount, it doesn't even have a meaningful unit of measure. Nor will even interviewing A shed any real light.
But this is just the start of the problems. From the law of diminishing marginal utility, we know that a consumer will place a lower and lower subjective value on cash as the amount possessed increases. The law also applies to all other goods desired and possessed, including good Z. Alternate possible exchanges involving other products also impact on the terms of exchange of Z.
In the end, even if we were to limit our economy to a single unchanging good and a single consumer, the purchasing power of money would be unstable, as well as meaningless.
Regards, Don |
